Seven Sells Its MGM Stake to Kerkorian
Australia’s Seven Network said Wednesday that it was bailing out as one of Metro-Goldwyn-Mayer’s two major financial backers, selling its 25% stake in the cash-strapped studio to majority shareholder Kirk Kerkorian for $389 million.
The buyout, which cements the 81-year-old Las Vegas billionaire’s control of the ailing company by increasing his interest to 90% from 65%, underscores the severity of MGM’s current financial straits just two years after Kerkorian and the Australian broadcaster ponied up $1.3 billion for the legendary studio.
Kerkorian, whose total investment in MGM stands at nearly $2 billion, will pay $24 a share for Seven’s interest--a 60% premium over MGM’s close at $15.31 a share Tuesday and equal to the share price the partners paid for the studio in July 1996. Wednesday’s news sent the company’s shares up $2.88 to $18.19 on the New York Stock Exchange.
Through his Las Vegas-based company Tracinda Corp., Kerkorian originally doled out $871 million in cash for 65% of MGM, while Seven put up $250 million for its 25% share.
Seven, which became increasingly disenchanted with its investment in MGM as the studio’s financial problems mounted, will walk away with a small loss. After MGM purchased Orion Pictures and Goldwyn Entertainment last year for $573 million, Seven’s total investment came to about $400 million.
Even with the interest it has incurred over the two years, Seven will wind up taking “a fairly small write-off after a tax deduction,” said Wall Street analyst Harold Vogel of SG Cowen Securities.
Many are asking why Kerkorian would step up and buy out Seven at a time when MGM is struggling financially and seeking to bail itself out through a joint venture transaction with a major media company or an outright sale. Disney and Warner Bros., which holds video rights to MGM’s valuable 4,000-title library, are among those talking to MGM about potential ventures.
Buying Seven’s shares “makes the transaction cleaner for him if he ends up selling the studio to Disney or some other media company,” Vogel suggested.
Kerkorian can easily afford to make the additional investment, and analysts said he has generally taken care of minority shareholders in his companies. Sources also said it was a way for him to get rid of the one dissenting voice on MGM’s board--Seven Chairman Kerry Stokes.
It has been well-known for some time that Stokes, who along with the network’s U.S. representative, Michael Gleason, will resign from the MGM board Sept. 1, has been distressed about MGM’s huge overhead and mounting losses and the direction that Kerkorian and MGM Chairman Frank Mancuso have wanted to take the company.
Sources said that as MGM’s troubles heightened, Stokes, 57, became even more agitated, opposing plans by management to expand the company. Sources also suggest it was Stokes who has been leaning on Kerkorian to sell the company.
The market’s lack of support for MGM’s initial public offering in November 1997, in which only 9 million common shares--rather than the hoped-for 12 million--were sold for $20 million, didn’t help raise Stokes’ confidence in MGM’s prospects.
Industry analyst Art Rockwell said Stokes was “unhappy that Kirk and Mancuso wanted to build the operation” and that Seven “simply doesn’t have the resources to play the game.”
Seven attributed its decision to get out to its own problems at home, no doubt exacerbated by the financial crisis in Asia.
A spokesman for Stokes said he had no comment beyond a brief prepared statement.
Vogel said that in addition to “its own challenges in its home market,” Seven “really derived no visible significant benefit from its relationship with MGM, so they were smart to look for an exit.”
Seven’s concerns were evident when the broadcaster declined to participate in a $250-million rights offering that the company announced a few months ago.
Along with Tracinda’s news Wednesday that it was buying out Seven, MGM simultaneously said that its board had voted to increase the size of the offering from $250 million to $500 million and that Kerkorian’s Tracinda had agreed to fully support the offering.
Given that Kerkorian now owns 90%, his minimum infusion will be $450 million, but sources said he’s prepared to put in the additional $50 million if the public shareholders, who own 10% of the company, choose not to subscribe to the offering.
An MGM spokesman said Wednesday that the proceeds of the offering will be used to pay down MGM’s $1.13-billion debt and to lift the company’s temporary freeze on TV development. Two weeks ago in its latest filing with the Securities and Exchange Commission, MGM reported it had only $132 million remaining in its $1.3-billion credit facility and that, as a result of its cash crunch, it would institute cutbacks.
An MGM insider suggested that the reason Stokes decided to bail out now was that “he didn’t want to be diluted by the rights offering.” In other words, Seven’s share would have fallen way below 25% with Kerkorian acquiring the additional shares in the company.
An MGM official said the company considers Kerkorian’s gestures Wednesday “a vote of confidence” in MGM.
Mancuso said in a statement, “The increase in the size of our rights offering, together with the purchase of Seven’s interest in the company, demonstrate the tremendous commitment that Kirk Kerkorian and Tracinda have for MGM.”
That view is not widely held in the industry, because the economics of the movie business suggest an uphill battle for a stand-alone film studio like MGM.
“It’s hard to say if Kirk’s in it for the long haul, knowing the history of this company,” Vogel said, referring to the fact that Kerkorian has bought and sold MGM three times over the last 29 years. “Chances are it’s just a cleanup.”
Rockwell, an analyst and former vice president at MGM under Kerkorian’s ownership in the mid-1980s, takes the latest developments as a signal that “the company is back in business again.”
While Rockwell acknowledges that Kerkorian is “unhappy that they went through cash so quickly because of the heavy buildup in film and TV,” he views this as a “one-time occurrence” and said, “Kerkorian is in it for the longer term as an operating company and is not looking to sell.”